Kamco Industrial Sales, Inc v. Lovejoy

March 10, 2011

KAMCO INDUSTRIAL SALES, INC., PLAINTIFF,v.LOVEJOY, INC., DEFENDANT.

The opinion of the court was delivered by: Pollak, J.

OPINION

On April 1, 2009, Kamco Industrial Sales, Inc. ("Kamco"), the plaintiff in this diversity action, filed a complaint alleging that defendant Lovejoy, Inc. ("Lovejoy") committed breach of contract and violated the Pennsylvania Commissioned Sales Representative Act, 43 Pa. Cons. Stat. § 1471 et seq. ("PCSRA"). After the close of discovery, Lovejoy filed a motion for summary judgment. For the reasons presented below, Lovejoy's summary judgment motion will be granted in part and denied in part.

I. BACKGROUND

In 1988, Kendall Morrison founded plaintiff Kamco, which is a Pennsylvania corporation with its principal place of business in Valley Forge, Pennsylvania. Kamco serves as a commissioned sales representative, marketing products for use in the power transmission industry. Lovejoy, which is an Illinois corporation with its principal place of business in Downers Grove, Illinois, is a manufacturer and distributor of couplings and other power transmission component parts. On December 18, 2003, the parties entered into the Lovejoy, Inc.-Kamco Industrial Products, Inc. Sales Representative Agreement (the "Agreement"), through which Kamco became a commissioned sales representative for Lovejoy.

Under the terms of the Agreement, Lovejoy authorized Kamco to sell Lovejoy's products in Maryland, Delaware, the District of Columbia, and portions of Pennsylvania and New Jersey (the "Territory"). See Agreement ¶ 6.*fn1 The Agreement also provided that, as long as the Agreement remained in force, Kamco would receive commissions for "all orders accepted by [Lovejoy] from their territory," apart from orders falling onto one or another of several expressly excepted categories. Id. ¶ 7. The exception at the center of the present lawsuit concerned so-called "House Accounts," or accounts which would be handled directly by Lovejoy's in-house sales employees. With respect to such accounts, the Agreement provided:

c) No commissions will be paid on House Account sales. The Company reserves the right to redefine these accounts. Addendum A attached shows a current roster of the aforementioned accounts in your territory.

Id. ¶ 7(c) (hereinafter "House Account provision").*fn2
At the time the parties entered into
the Agreement, Addendum A listed six House Accounts. Id., Add'm A.

The Agreement also contained other provisions relevant to the present dispute. First, it contained a non-competition provision which stated that Kamco could not "offer, promote or sell any product which is directly competitive with any product [Kamco] is to offer, promote or sell" for Lovejoy without Lovejoy's written consent. Id. ¶ 2. Second, it provided that during the first six months of the Agreement Kamco would be entitled to a three percent (3%) commission on sales to pre-existing customers, and an eight percent (8%) commission on all "new business" generated by Kamco. Id. ¶¶ 9-10. After the first six months, the commission rate for all business would be five percent (5%), irrespective of whether the business was classified as new or pre-existing. Id. ¶ 11. Third, with respect to termination, the Agreement provided that it would last for one year and would be automatically renewed for one-year periods thereafter unless terminated in writing by either party 60 days before the start of a new one-year term. Id. ¶ 16.

Pursuant to the Agreement, Kamco began operating as a commissioned manufacturer's sales representative for Lovejoy on January 1, 2004. Kamco marketed couplings and a variety of other products manufactured and sold by Lovejoy for use in the power transmission industry.The parties operated under the Agreement for several years without any serious disputes arising. During that period, Kamco also served as an independent sales agent for at least eight different manufacturers other than Lovejoy. See Def.'s Ex. D, Pl.'s Resp. to Lovejoy's Interrog. No. 2, at 2.*fn3

Prior to 2009, defendant Lovejoy made changes to the list of House Accounts on three occasions. First, in May 2006, defendant Lovejoy decided to remove a customer named Ingersoll-Rand from the House Account list and redefine it as a Kamco account. Lovejoy's Director of Sales Douglas Durham explained in his deposition that Kamco's owner Ken Morrison: had other products that he was selling into that account. We had had a sales-a direct salesperson change at that point in time . . . and it just seemed logical that Ken would use his relationship there to continue his business.

See Pl.'s Ex. 3, Durham Dep. at 21:10-19; see also Pl.'s Ex. 5, Letter from Mike Power, Lovejoy, to Ken Morrison, Kamco, May 17, 2006 (providing that Kamco would have account responsibility for Ingersoll-Rand effective May 1, 2006). Second, in October 2008, Ingersoll-Rand was redefined as a House Account after another company purchased it. See Pl.'s Ex. 1, Morrison Dep. at 137:17-139:2. On the third occasion, in March 2007, Lovejoy redefined another of the House Accounts, Bosch Rexroth Corp., such that Kamco would receive commissions on sales of products known as "covers" but not on the sales of "housings." See id. at 90:6-92:17; Pl.'s Ex. 6, Letter from Mike Power, Lovejoy, to Ken Morrison, Kamco, March 12, 2007.

The dispute that gave rise to this lawsuit emerged in January 2009. In the months before then, Lovejoy, like many American businesses, experienced falling revenues due to the economic downturn. In response, Lovejoy began taking measures to reduce its costs. For example, David Mortensen, Lovejoy's Vice President of Sales and Marketing, negotiated commission reductions with two other outside sales agents. See Def.'s Ex. A, Mortensen Dep. at 70:21-71:3. Lovejoy also contemplated terminating its Agreement with Kamco. See Pl.'s Ex. 7, Email from Douglas Durham, Lovejoy, to David Mortensen, Lovejoy, Oct. 8, 2008 (suggesting that Lovejoy "could also look at canceling Kamco"). However, Lovejoy elected not to terminate the Agreement and instead allowed it to automatically renew for an additional year on January 1, 2009.

On January 8, 2009, Mortensen, of Lovejoy, called Morrison, of Kamco, to discuss the parties' Agreement. During the course of the conversation, Mortensen acknowledged that, under the Agreement's termination provision, the Agreement could not be terminated until the end of the year. However, he explained that Lovejoy wanted to terminate the Agreement to save money and offered to pay Kamco commissions for three months in exchange for the termination of the agreement. At his deposition, Mortensen testified as follows regarding the conversation:

Q And what did you say to [Morrison]?

A Well, what I said was that per the contract that we couldn't terminate the contract except in, I think it was, October of every year-it was renewable if we didn't let him know 60 days before-but there was a clause in the contract that if we mutually agreed, we could either terminate the contract or change the contract and that my goal was to try and talk to Ken about getting cost savings in his territory, that we were doing this across the board. He would be a small part of the total cost savings we were looking for, but that we needed to see what we could do.

Q And what did you suggest that he do?

A Well, he said, "I have a contract," and repeated that five or six times.

And in the first conversation I said, "Ken, I know this has hit you as a surprise. Why don't you go back and look at the contract, and let's talk again in a couple of days." * * * * Q Did you ever suggest to him that you would agree to pay him commissions through March of 2009 if he voluntarily agreed to give up the contract?

A Well, that was-that was an offer that I had approval to present to him from the owner, so I did tell him that.

Q Did you make that offer?

A Yes, I did.

See Pl.'s Ex. 4, Mortensen Dep. at 7:6-8:4; 10:3-11. In his deposition, Morrison likewise testified that Lovejoy proposed to pay Kamco commissions through the end of March 2009and then to terminate the contract. Pl.'s Ex. 1, Morrison Dep. 116:14-117:3.

During a follow-up conversation, Mortensen informed Morrison that, if Kamco and Lovejoy couldn't agree to terminate the contract, Lovejoy would explore other ways to save costs in Kamco's territory, including through redefinition of commissioned accounts as House Accounts. As Mortensen testified in his deposition:

My goal was to get cost savings out of [Morrison's] territory, not necessarily to terminate the contract, but that was one way we could. Another way to do that would be to move many of the accounts to be house accounts where we didn't pay him commission on it [sic]. And through the discussions, I said if we can't reach a mutual agreement to terminate the contract, then we need to get cost savings, and this is one way that we believe legally in the contract we can do that.

See Def.'s Ex. A, Mortensen Dep. at 14:10-22. Morrison similarly testified that Mortenson told him during the follow-up conversation that Lovejoy had "the right to make all the accounts in [Kamco's] territory house accounts." Pl.'s Ex. 1, Morrison Dep. at 117:23-118:1; see also Pl.'s Ex. 12, Letter from Ken Morrison, Kamco, to David Mortensen, Lovejoy, March 6, 2009 ("On January 8, 2009, you told me that unless I accepted immediate termination of my contract with Lovejoy with payment of commission only through March 2009, Lovejoy would convert all of my customers to house accounts.").

Morrison ultimately told Mortensen that he would not agree to the proposed termination of the Agreement at the end of March 2009. Mortensen then began planning to follow through on his suggestion that he would redefine commissioned accounts as House Accounts. On January 15, 2009, Mortensen wrote to Lovejoy's Chief Financial Officer proposing that Lovejoy "send [Kamco] a new Addendum [A] with many more accounts on it that basically includes all Kamco's current accounts . . . ." Pl.'s Ex. 9, Email from David Mortensen, Lovejoy, to Woody Haddix, Lovejoy, January 15, 2009 (emphasis added). The following day Mortensen wrote to another Lovejoy employee, asking her to develop a list of all of Kamco's accounts:

I need to send Kamco a letter by the end of the month changing Addendum A to their contract that shows house accounts and listing all the accounts in their territory. I guess we should do it with both the account number and the account name. The goal is to transfer all of them to house accounts on 1/31/09. We will pay them normally through January, but for sales after ...

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